Madras HC: IBBI is empowered to levy fee as a % of Annual Remuneration drawn as an IP

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IBBI LEVY OF FEE
The power of the Insolvency And Bankruptcy Board Of India (the "IBBI") to levy fee of 0.25% of the professional fee earned for services rendered as an IP in the preceding financial year and also 0.25% of the turnover of an IPE in the preceding financial year and the regulations thereof were challenged before the Hon'ble High Court of Judicature at Madras.
IBBI LEVY OF FEE

MADRAS HC: IBBI IS EMPOWERED TO LEVY FEE AS A % OF ANNUAL REMUNERATION DRAWN AS AN IP

The power of the Insolvency and Bankruptcy Board (the “IBBI”) to levy fee of 0.25% of the professional fee earned for services rendered as an IP in the preceding financial year and also 0.25% of the turnover of an IPE in the preceding financial year and the regulations thereof were challenged before the Hon’ble High Court of Judicature at Madras in the matter of CA Venkata Siva Kumar vs. IBBI.

Since the IP who has challenged this power of IBBI is not a partner or a director of any IPE, the Court declined to exercise the discretion to examine the constitutional challenge to the Regulation levying turnover-based fee on IPEs.

Accordingly, in the instant case, the Hon’ble High Court examined the following three issues:

  1. Whether Regulation 7(2)(ca) of the IBBI (Insolvency Professionals) Regulations, 2016 (“IP Regulations”) levying fee of 0.25% of the professional fee charged by an IP in the preceding FY is ultra vires Section 196 and 207 of the Insolvency and Bankruptcy Code (“IBC” or “Code”)?
  2. Whether quid pro quo is absent in the levy of such fee under Regulation 7(2)(ca)?
  3. Whether Regulation 7(2)(ca) suffers from excessive delegation?

As far as the first issue is concerned, the Hon’ble High Court referred to Section 196(1)(a) which expressly confers power on the IBBI to register insolvency professional agencies and IPs, and to renew, withdraw, suspend and cancel such registration and Section 196(c) thereof which empowers the IBBI to levy fees or other charges including for registration of insolvency professional agencies and IPs and for the renewal of such registration and also Section 240(1) which does not impose any restraints on the powers of the IBBI, except that regulations should be consistent with the IBC and the rules thereunder and should be for the purposes of carrying out the provisions of the IBC.

Hence, from these provisions, the Hon’ble High Court deduced that the fee making power is not subject to any fetters except that it should be for carrying out the purposes of the IBC. Having noted so, it concluded that the IBBI is duly empowered under Sections 196 and 207 of the IBC to levy a fee on IPs, including as a percentage of the annual remuneration as an IP in the preceding financial year.

With respect to the next issue on whether quid pro quo is absent in the levy of such fees, the Hon’ble High Court relied on the precedent of the Supreme Court in the matter of BSE Brokers’ Forum wherein the Hon’ble Supreme Court had categorically held that quid pro quo is not a condition precedent for the levy of regulatory fees and that it is sufficient if there is a broad correlation as between services provided and the fee charged. Alongside that the Hon’ble High Court also referred to both the FSLRC and BLRC Reports, wherein it was recommended that the regulator should be self-sufficient at least with regard to operational expenses by collecting fees to finance its activities.

The Hon’ble HC further noted that the IBBI is entrusted with various responsibilities with specific reference to Insolvency Professionals which include:

  • Recommending a RP if the operational creditor concerned fails to do so
  • Confirming the proposal of the committee of creditors (“CoC”) with regard to the appointment of the RP or the replacement RP, as the case may be
  • To take necessary action against resolution professional, if such RP acts without seeking the approval of the CoC as required under Section 28 of the Code and the same is reported by CoC to IBBI
  • And also, with regard to proposing the name of an IP as a liquidator, the IBBI plays a role under Section 34 of the Code

Having noted so, the Hon’ble High Court concluded that the IBBI does provide significant services, including in relation to IPs and that there is broad correlation between fees and services and hence, Regulation 7(2)(ca) of the IP Regulations does not suffer from any constitutional infirmity on account of the absence of quid pro quo.

And finally, with respect to the issue on whether Regulation 7(2)(ca) suffers from excessive delegation, the Hon’ble High Court observed that adequate safeguards are in place to ensure that the funds of the IBBI are utilized for the purposes of fulfilling the role of the IBBI under the IBC and moreover the conferment of the power to charge a fee and the charging of such fee by using the annual remuneration as a measure does not amount to delegation of an essential legislative function.

With the above observations, the Hon’ble High Court dismissed the Writ Petition challenging the power of IBBI with respect to levying of fee of 0.25% of the professional fee earned for services rendered as an IP in the preceding financial year.

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